China Targets Dollar, Washington Has Conniptions

Now even Israel – joined at the hip to the US though the relationship has run into rough waters – has applied to become a founding member of the China-led Asian Infrastructure Investment Bank. Despite US gyrations to keep them from it, over 40 countries, including bosom buddies Australia, Britain, and Germany, have signed up to join. Japan is still wavering politely.

The US government sees the China-dominated AIIB as competition to the US-dominated World Bank and Asian Development Bank. But now that it is clear even to the White House that the US can’t stop the tide, Treasury Secretary Jack Lew backpedaled vigorously on Tuesday. The government would welcome the AIIB, he suddenly said, as long as certain conditions are met, such as adequate transparency.

So after this bruising setback, the US now has another opportunity to oppose China’s financial and monetary ambitions.

China is trying to get the IMF to bestow reserve currency status on the yuan, which would add the yuan to a glorious basket that includes the dollar and the euro – currently the dominant reserve currencies with a 63% and 22% share respectively. So it has been lobbying core members of the IMF behind the scenes for support, and they’re coming around despite US conniptions, the Wall Street Journal reported.

China also wants the yuan to become part of the IMF’s Special Drawing Rights “in the foreseeable future,” Yi Gang, Director of the State Administration of Foreign Exchange and Deputy Governor of the People’s Bank of China, pointed out a couple of weeks ago. With the yuan, SDRs – which currently include only the dollar, the euro, the yen, and the British pound – would “undoubtedly” be more “representative” of the global economic landscape, Yi said.

Numerous countries are already publicly supporting the yuan as a payment currency. Excluding transactions between China and Hong Kong, the yuan’s use as payment currency is still tiny and edged down last year, handicapped also by China’s restrictions on capital flows. But hey, those are minor details. By now, there are 15 yuan clearing centers around the world, including in London, Frankfurt, Paris, and Luxembourg.

And oops, the rebellious city of Los Angeles, in the rebellious state of California, has signed such a deal with the Industrial and Commercial Bank of China late last year, without apparently asking distant Washington for permission. So this is happening, whether the US government wants it or not.

And 20 central banks, once again including US allies Australia and the UK, have inked $430 billion in currency-swap agreements with China.

Baby steps, all of them, but part of a slow, methodical, relentless process of elevating the yuan and whittling away at the power of the dollar – and by extension, the power of the long arm of the US government.

More immediately, all these efforts contribute to making the yuan “freely useable,” which is what a currency must be in the eyes of the IMF in order to qualify as a reserve currency. And the IMF’s executive board will rule later this year on the yuan’s reserve currency status. Hence China’s intense lobbying.

The governments of Germany and Australia have already indicated that they would support the yuan as a reserve currency; other countries that support the yuan as a trading currency are expected to do the same.

It would be a huge win for China. Central banks around the globe would start buying the yuan, necessarily at the expense of other currencies, including the dollar. It would create demand for the yuan. It would raise China’s profile on the global stage. It would, in fact, bring China one step closer to being a full-fledged economic, financial, and political challenger to the US in a US-dominated system.

The US government has been, let’s say, lukewarm in its support for the idea. And it’s fighting back. To truly internationalize the yuan, China would need to first implement “a more market-determined exchange rate, interest-rate liberalization as well as strengthening of financial regulation and supervision,” Lew said.

These three items are where the Fed excels: It has manipulated the exchange rate of the dollar for decades; it has repressed interest rates to near zero for over six years; and it has abysmally failed “financial regulations and supervision,” as the Financial Crisis has amply demonstrated. So Lew’s concerns are baffling. Unless they’re a pretext, in which case they’re not baffling.

But US opposition at the IMF could still be difficult to overcome: the US has nearly 18% of the vote, as opposed to China, the second largest economy, which has a puny 3.8% of the vote. With the odds stacked against it, China would have to get the support of a lot of other countries.

The US is trying to leverage its power at the IMF to get China to reform its financial sector and liberalize its financial markets, though it remains unclear if the US’s manipulated financial markets and a financial sector gone haywire under the direct supervision and encouragement of the Fed make such a great model for China to follow.

Despite these US conniptions, the writing is on the wall, at least for the long term. IMF Managing Director Christine Lagarde summarized it last week while in China: The yuan as a reserve currency, she said, is more a matter of when, not if.

For China, it’s part of a long-term strategy, and not dependent on the next election cycle: reign in the power of the dollar – and the benefits it conveys to the US – by elevating the yuan and transferring some of those benefits to China. It won’t happen on a straight line. A “hard landing” or the outright implosion of the China bubble would be one of the zigzags along the way. But it will happen, and the US government is only able to slow down the process.

After six years of reckless monetary policies around the globe, asset bubbles have been inflated nearly everywhere, though no top banker is allowed to admit it in public. But this bank CEO must have accidently veered off script during the press conference. Read… “The Mother of All Bubbles” in Stocks and Bonds: Bank CEO

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20 comments for “China Targets Dollar, Washington Has Conniptions”

matt

Apr 2, 2015 at 9:35 am

I would not worry about this too much people. When these central banksters and banks get wiped out with the collapse that is occurring. When China can no longer prop up the economy with ghost cities, roads and bridges to nowhere and the people revolt, what is left?

One thing I don’t get; how can a currency have a reserve status, or be considered a reserve currency, when it’s pegged to the dollar? I notice that removing the yuan’s dollar peg isn’t one of the requirements that Lew specified.

interesting

Apr 2, 2015 at 3:27 pm

Rula,

thanks for being a voice of reason in this insanity……unless the peg is removed what’s the f’ing point??????????????????????????????

It does not matter if it’s the IMF or AIIB or the Fed they are all central bankers. This old system is going away this oligarchy bankers.
Remember the 5th plank of the communist manifesto is central banking!

Petunia

Apr 2, 2015 at 1:38 pm

Of course countries are going to accept the Yuan for payments. China actually makes things people can buy, as opposed to the US, where we only manufacture financial chaos.

Ray

Apr 2, 2015 at 3:22 pm

Going as planned:
Problem: Money printing
Reaction: Currency War
Solution: Single World Currency (and no it’s not going to be gold)

They are winning and we are unwittingly cheering them along.

interesting

Apr 2, 2015 at 3:23 pm

“China is trying to get the IMF to bestow reserve currency status on the yuan”

that makes zero sense, the only thing China has going for it is a cheap currency and wouldn’t ‘reserve currency status’ destroy China’s export based economy by strengthening the yuan?

The Spanish Inquisition

Apr 2, 2015 at 4:24 pm

I was thinking the same thing. A rising Yuan against the US dollar is the greatest gift China could give the US economy. Walmart would have to find new suppliers, to be sure, but US labor would become increasingly competitive. China would only import unemployment.

But I don’t think China is willing to pay the high costs of unemployment associated with a reserve currency. This is likely just noise and disconnect between the charter of the AIIB and the PBoC.

Michael Gorback

Apr 2, 2015 at 5:20 pm

I completely agree. They would have to turn their entire economic strategy upside down in order to do this. the issuer of a world reserve currency has to run trade deficits.

But wait … the dollar makes up 62% of the world’s reserve currency holdings. The euro accounts for 22% (down from nearly 30% before the debt crisis). Other currencies make up the difference. The Eurozone has had a TRADE SURPLUS for much of its existence with the rest of the world, which proves that in reality, issuing a reserve currency does NOT require running a trade deficit.

Just like the Eurozone, China (once approved) will issue a reserve currency AND have a trade surplus. No sweat.

Julian the Apostate

Apr 2, 2015 at 7:44 pm

It looks to me that China is inflicting a thousand cuts. Fact: they are stockpiling gold hand over fist. Fact: the Shanghai PM market deals only in physical metal. Fact: the hegemony of the dollar is getting long in the tooth, and is fiat to boot. Fact: the US is a debtor nation, and we have destroyed our manufacturing base. Lew is demanding the opposite of US policy be inflicted on China. Fact: the current regime has succeeded in pissing off most of the rest of the world. The Chinese can see that all the world’s currencies are joined at the hip. Looks to me that they’d like some say so over the process so they can apply some brakes on the runaway train they are riding on with the rest of us. A stable currency would also go a long way toward developing their domestic market. Who knows? Maybe they just want it to crash and burn, but if they do they’re sure taking the long way around the barn. And to stick with the rustic homilies the US is all hat and no cattle. May you live in interesting times!

rjohnson

Apr 2, 2015 at 9:33 pm

As others have noted reserve status for the Yuan won’t happen unless if freely floats.

But all this fanfare is a preparatory framework for the inevitable decline of the dollar.

America has lost much of its moral high ground and thus the dollar has all the appeal of a cancerous wort to many global residents. China’s strategy is to be the inevitable ‘step in currency’ should the US fall.

At my last count US dollar daily overturn on the FX markets was 4.5 trillion per day (dated figure). Can’t see the Yuan filling the dollars liquidity shoes. Have a feeling the world will run away from the dollar first chance it gets though. But they gotta get rid of the dollars they already have.

Hence I don’t see this happening via rational, gradual change. The safe haven status of the dollar would have to be irrevocably questioned. The dollars value would have to vanish overnight. It would need to be excommunicated from the family of nations.

A major terrorist event in the US (plague, alien invasion, nukes), would seem to fit the bill. You can bet the bad guys know this. It is sad that the world as a whole will cheer them on. But that’s what happens when you put on a black hat.

In which case the dollar will be rudely pushed out the party door late one night, fiendishly clutching a bottle of cheap Chianti and some moldy party dip.

“China is trying to get the IMF to bestow reserve currency status on the yuan, “

The market will do the bestowing, not the IMF or anyone else. If yuan was to be a reserve currency the time for it has likely passed: what supports China’s currency claims is the same energy inefficiency that undermines them.

China is not a credit provider, it is a goods provider using the forex it gains from sales as collateral to multiply the yuan supply. Most of this increase is domestic … it is the reason why China sprouts a forest of vacant, rotting office- and apartment towers.

Contrast to the dollar … its increase is directed largely overseas. This is the REAL reason why China sprouts a vacant forest. Put another way: China manufactures poison dog food, the US (Wall Street) manufactures credit for the entire world.

China can make poison b/c it has the appropriate infrastructure, it cannot manufacture credit because it made a choice to do so. In China, there is no rule of law, no property rights … there is no yuan freely traded on world currency markets. These things cannot be created ‘pop-up’ fashion overnight. In fact, China ‘success’ is built on throwing property rights/enforceable contracts/jurisprudence into the toilet and flushing.

The increase in dollar credit is unsecured which is all you need to know about the so-called ‘worthlessness’ of the dollar. Dollar offers the best deal for gasoline, which is why other currencies are traded for it around the world. China is more wasteful than the US (if such a thing is possible) which is why that country’s economy expands: China can have dollar-credit-driven economic expansion OR yuan as (pretend) reserve currency but not both at the same time. ‘Reserve’ yuan would be like sterling or won = irrelevant.

China really has no collateral other than dollar bonds and other forex denominated holdings: they are all promises as empty as China’s towers (some piles of coal, iron ore, copper and zinc). All these things are (worthless) claims against dollars/resource capital and Chinese bosses know it. China is sound and fury signifying nothing: they copy the US right down to its (dead) malls, stupendous traffic jams and murdering smog … China is Las Vegas on steroids. How can the country succeed using an American model that has blatantly failed in the country of its invention?

Biggs

Apr 3, 2015 at 9:18 am

It seems to me that many commenter here have failed to understand that China is proposing a basket of currencies with the Yuan included. USD, Euro, Yuan makes a lot of sense and is something the IMF has been considering for some time.

Julian the Apostate

Apr 3, 2015 at 11:09 am

Steve makes a lot of sense. If China does somehow pick up the mantle of reserve currency it will be because the US has bungled it. China is where we were in the 19th century, minus as Steve points out, property rights. And no gold standard to punish malinvestment, like we did with government interference with the railroads that caused the 1873 crash.

Brian

Apr 3, 2015 at 4:08 pm

Treasury Secretary Jack Lew backpedaled vigorously on Tuesday. The government would welcome the AIIB, he suddenly said, as long as certain conditions are met, such as adequate transparency.

You mean like the “TRANSPARENCY” we have with the privately-owned Federal Reserve?